As Profits Soar, Oil Industry Unapologetic

Chart compares first-quarter profits of three large U.S. oil companies; two versions (AP Graphic) (AP)

Chevron also is receiving a financial lift from a deal that Congress helped make last year. The San Ramon, Calif.-based company bought rival Unocal Corp. for $18 billion eight months ago, prevailing over a higher offer from a bidder backed by China's government. The Chinese bidder, CNOOC Ltd., withdrew after Congress threatened to block a Unocal sale to a company outside the United States.

The Unocal acquisition is paying off even better than Chevron envisioned, executives said.

"Our company is in an excellent position to continue adding value for our stockholders and helping to satisfy the energy needs of the world economies," Chevron Chairman David O'Reilly said.

Expanding on that theme, President Bush, a former oil man, said Friday that he expects the industry to invest its huge profits in more oil production, refining and transportation capacity to help alleviate supply congestion down the road.

But oil companies already are spending more to search for oil even as they ramp up current production. Exxon, for instance, poured $4.8 billion into exploration and other other capital spending, a 53 percent increase from last year _ but still less than the company spent on share repurchases.

"There's capital flowing into the sector unlike anything we've seen in recent years," said Art Smith, chief executive of energy consultant John S. Herold. Nevertheless, it will take time to reverse two decades of cautious spending, he said.

Republicans and Democrats floated a wide range of proposals this week to punish the industry and soothe consumers.

Senate GOP leaders unveiled a 10-point plan that included a $100 fuel-cost rebate for millions of taxpayers, rescinding oil industry tax breaks and opening an Alaska wildlife refuge to oil drilling _ a longtime goal of several large oil companies.

On the other side of the aisle, Sen. Charles Schumer, D-N.Y., is asking the Federal Trade Commission to monitor refiners this summer, while Sen. Ron Wyden, D-Ore., offered a bill that would require energy companies to pay a federal royalty on all oil pumped from the Gulf of Mexico if oil prices exceed $55 a barrel. Some oil now is exempt from royalties, costing the government billions of dollars.

Outspoken oil industry critic Doug Heller is hopeful the latest news about oil industry profits will finally persuade lawmakers to impose a windfall tax _ a notion President Bush rejected on Friday.

"The only thing more shocking than these profits is the prices that motorists are being forced to pay at the pump," said Heller, executive director of the Foundation For Taxpayer and Consumer Rights in Santa Monica, Calif. "It's hard to imagine that these numbers won't rattle the cages pretty severely."

While a serious discussion of U.S. energy policy is long overdue, analysts said they are leery of knee-jerk government intervention, insisting elected officials are doing a public disservice by not doing a better job of explaining how the global oil market works.

"It's late in the game," said Antoine Halff, director of global oil at Fimat USA in New York. "The only policy changes that would have an immediate effect would be demand restraints, such as increases in gasoline taxes, alternate driving days or enforcement of speed limits." Halff does not consider any of these will be suggested in Congress, especially during an election year.

Economists are perhaps most troubled by the possibility that lawmakers will consider suspending the federal 18.4-cent-per-gallon gasoline tax. All that would do is raise demand and worsen the government deficit _ a lose-lose proposition, they said.

Art Smith, chief executive of energy consultant John S. Herold, said $75 oil is "the best thing that could happen to the alternative energy business" and is the greatest force for change in the market. He and other analysts said SUV sales are already declining, and they expect Americans to think more critically about the energy efficiency of their homes and the lengths of their commutes in the years ahead.

But it may take years before changes in consumer behavior affect the market.

"In the meantime, you as a consumer have three options," said Ebel of CSIS. "You have car keys, light switches and a thermostat. Use them judiciously."

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Michael Liedtke reported from San Ramon, Calif., Brad Foss from Washington.